WOW Buyout Could Empower Regulators

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Washington— If WideOpenWest LLC completes its acquisition of SBC Communications Inc.'s Midwestern cable systems, competing operators might be surprised to learn that local governments could be in position to reclaim the right to regulate basic rates.

A few dozen cable systems scattered around Illinois, Michigan and Ohio — the location of SBC's major cable properties — have enjoyed total deregulation for months (and, in some cases, years), thanks to a provision in the Telecommunications Act of 1996 aimed directly at systems facing telephone-company competition.

As a practical matter, cable operators overbuilt by telcos are no longer subject to local or federal rate controls, upon a showing approved by the Federal Communications Commission.

The scope of the deregulation is broader than just the elimination of price controls. Affected cable operators are no longer subject to uniform pricing rules, equipment and installation regulations or prohibitions on buy-throughs and negative-option billing.

In January, the FCC added to that list when it said cable operators subject to effective competition didn't have to sell TV stations on the basic tier or sell all local-TV stations to subscribers before they may offer expanded-basic, premium and pay-per-view services.

But with WOW's pending purchase of SBC's properties, cable operators might have to worry that the change in control from a phone company to a non-telco overbuilder might give local governments the idea that they can begin to regulate basic rates again.

WOW's entry could affect cable systems owned by Comcast Corp., AT&T Corp., Time Warner Cable, Insight Communications Co. and Adelphia Communications Corp. in 33 communities in Ohio, Illinois and Michigan — and involve thousands of subscribers.

Once the deal goes through, local governments must decide whether they want to control basic rates. They would also need FCC permission to regain that authority.

Operators would not be required to inform the FCC that the agency's decisions to deregulate them may no longer be valid, according to an agency source.

TOP OF MIND: TRANSFER ISSUES

For now, local governments appear to be more focused on coping with the SBC-WOW franchise transfers than on collateral rate-regulation issues.

Attorney Tim Currier represents 11 Michigan communities. Four of them — Royal Oak, Huntington Woods, Clawson, and Troy — lost the authority to regulate AT&T Broadband's basic rates after SBC (formerly Ameritech Corp.'s Ameritech New Media unit) entered the market.

Currier said it was too soon to decide whether any of his clients would seek to reregulate after WOW becomes the new competitor.

"We haven't made that decision. We have to get the clients in and see how they want to consider it," Currier said.

Keena Smith, executive officer of the Columbus, Ohio, department of technology, said the city 's cable regulators are not focusing on rate regulation.

"It's not something we have decided at this point," said Smith, Columbus' top cable regulator. "We were just notified that SBC had been sold to WOW."

Last month, SBC agreed to sell its 310,000 cable subscribers to WOW for between $200 million and $300 million. The deal is the largest retreat from the cable business by a local telephone company to date.

The sale isn't expected to close until the end of the year, said WOW spokeswoman Betsy Edwards.

SBC began its cable exodus by pulling out of Connecticut and California, states in which it inherited systems from other phone companies that merged with SBC.

BellSouth Corp. has announced plans to shut down its wireless-cable venture in New Orleans, where several local Cox Communications Corp. systems were deregulated. Verizon Communications is attempting to sell cable systems once owned by GTE Corp. in Florida's Tampa-St. Petersburg market — where several Time Warner Cable systems have been deregulated — and a wireless system in Hawaii.

Prior to 1996, a cable operator couldn't obtain deregulation from the FCC unless all of its competitors combined served more than 15 percent of households in a franchise area. The 15-percent test, which was enacted before the direct-broadcast satellite industry became a factor, effectively regulated every large cable operator's rates.

In 1996, Congress threw out the 15-percent test in cases where cable operators compete with incumbent local-exchange providers, on the theory that deep-pocketed telcos would gobble up market share more quickly than regulators could react. All the FCC requires is that a phone company deploy facilities in a substantial portion of a given franchise area.

Local governments aren't likely to seize control of basic-tier pricing even if WOW becomes the new competitor. Officials would have to decide whether WOW's ownership justified regulating basic, especially when they can't set upper-tier prices, which were decontrolled on March 31, 1999.

They also would have to determine whether the incumbent cable operators are subject to effective competition under the 15-percent test, even if they no longer can avail themselves of the phone-company test.

WOW MIGHT MEET TEST, ANYWAY

Local officials and WOW executives said they believe that at least 15 percent of the households in SBC's franchise areas subscribe to the overbuilder's service. If DBS homes are included in the penetration test — which the law allows — close to none of the incumbent cable operators are likely to see basic rates reregulated.

In Illinois, EchoStar Communications Corp. and DirecTV Inc. serve 15.6 percent of TV households; in Michigan, 18.4 percent; and in Ohio, 16.2 percent, according to SkyTrends in Golden, Colo.

Attorneys for Sterling Heights, Mich., were not persuaded that efforts to reregulate an incumbent's basic rates would serve any purpose.

Neil Lehto, a partner with O'Reilly, Rancillio, Nitz, Andrews, Turnbull & Scott — the city's law firm — said most Ameritech systems to be acquired by WOW will easily surpass the 15-percent threshold contained in the 1992 Cable Act.

"Competition has served us well," Lehto said. "I'm going to go out on a limb and say that the majority of the [SBC] systems will achieve that level."

Also preventing communities from applying for regulatory authority is the fact "that they can only regulate basic rates. And nobody just takes the basic package," Lehto said.

Even if an area city did petition the FCC for the right to oversee rates, Comcast Corp., the dominant operator in southeastern Michigan, has a "social contract" with the FCC that sets basic rates well below what the federal agency would allow.

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